Anthony Gagliano & Co., Inc. v. Openfirst LLC ( 2019 )

COURT OF APPEALS
DECISION NOTICE
DATED AND FILED This opinion is subject to further editing. If
published, the official version will appear in
the bound volume of the Official Reports.
July 2, 2019
A party may file with the Supreme Court a
Sheila T. Reiff petition to review an adverse decision by the
Clerk of Court of Appeals Court of Appeals. See WIS. STAT. § 808.10
and RULE 809.62.
Appeal No. 2018AP432 Cir. Ct. No. 2008CV17601
STATE OF WISCONSIN IN COURT OF APPEALS
DISTRICT I
ANTHONY GAGLIANO & CO., INC.,
PLAINTIFF-APPELLANT,
V.
OPENFIRST LLC, CPR SYSTEMS INC., TARGET MARKETING SOLUTIONS INC.,
RWK ENTERPRISES, INC., OFH DISTRIBUTION LLC F/K/A OPENFIRST
HOLDINGS, OPENFIRST, INC., QUAD/GRAPHICS, INC. AND NEW DIVERSIFIED
MAILING SERVICES, LLC.,
DEFENDANTS,
ROBERT KRAFT AND NEW ELECTRONIC PRINTING SYSTEMS, LLC,
DEFENDANTS-RESPONDENTS.
APPEAL from an order of the circuit court for Milwaukee County:
STEPHANIE ROTHSTEIN, Judge. Reversed and cause remanded with
directions.
No. 2018AP432
Before Brash, P.J., Kloppenburg and Dugan, JJ.
¶1 BRASH, P.J. Anthony Gagliano & Co., Inc. (“Gagliano Co.”)
appeals an order of the trial court denying its postverdict motions and entering
judgment in favor of Robert Kraft and New Electronic Printing Systems, LLC
(“New EPS”). That order was the culmination of lengthy litigation stemming
from the alleged breach of a lease for commercial property located on North
Jefferson Street in the City of Milwaukee. That lease, dated May 2000, was
originally between Gagliano Co. as the landlord and Electronic Printing Systems,
Inc. (“EPS”) as the tenant, with Kraft personally guaranteeing the lease on behalf
of EPS. Subsequently, EPS’s assets were sold to several entities, including
New EPS;1 the lease was assigned to New EPS, with Kraft extending his personal
guaranty of the lease on behalf of New EPS.
¶2 The leased premises were vacated in the fall of 2008, and New EPS
ceased making rent payments. Gagliano Co. filed suit against New EPS and Kraft
in December 2008, alleging breach of contract for the failure to pay rent through
the end of the lease term, and claiming that Kraft was liable for the rents owed
pursuant to his personal guaranty. New EPS and Kraft, on the other hand,
contended that Gagliano Co. had added a provision to the lease which allowed
Gagliano Co.—the landlord—the option to extend the term of the lease. Gagliano
Co. had exercised that option, extending the lease term to 2010, as well as
extending the term of an amendment, which added more space to the leased
1
The protracted nature of this case is further complicated by the numerous entities
involved in the business throughout the duration of the lease, several of which were created and
subsequently sold during that time frame. For the sake of clarity and brevity, we limit our
references to the entities that are named in this appeal.
2
No. 2018AP432
premises, to 2012. Kraft and New EPS argued that Gagliano Co. had not
disclosed this landlord extension option to Kraft when the lease was executed, and
therefore Gagliano Co. had committed fraud by including that provision in the
lease. Thus, they asserted that the lease was void.
¶3 The order underlying this appeal was the result of a jury verdict from
the second trial in this matter, held in October 2017. The jury found that Gagliano
Co. had breached its duty to disclose the landlord extension option, that New EPS
had not breached the lease by ceasing to make rent payments in October 2008, and
that Kraft had not guaranteed New EPS’s performance of the lease. Therefore, the
jury concluded that no damages for unpaid rent were owed to Gagliano Co.
¶4 Gagliano Co.’s postverdict motions argued that the verdict was not
supported by credible evidence, and requested that the trial court grant judgment
in its favor notwithstanding the verdict. Gagliano Co. contended that the evidence
showed that Kraft and New EPS knew of the landlord extension option when
EPS’s lease rights were sold to New EPS and guaranteed by Kraft, and therefore
that provision was expressly agreed to by New EPS and affirmed by Kraft.
Furthermore, Gagliano Co. noted that subsequent actions by Kraft and New EPS
after their discovery of the provision—including the execution of the amendment
that added more space to the leased premises—also affirmed the lease. Therefore,
Gagliano Co. argued, Kraft and New EPS were bound by all of the lease’s
provisions, including the landlord extension option; as a result, the jury’s finding
that New EPS and Kraft did not breach the terms of the lease was not supported by
the evidence.
¶5 We agree that the evidence indicates that New EPS and Kraft
affirmed the lease with knowledge of the landlord extension option and, therefore,
3
No. 2018AP432
the jury verdict is not supported by the evidence. As a result, we reverse and
remand to the trial court to enter a judgment in favor of Gagliano Co.
notwithstanding the verdict, and for further proceedings to determine the amount
of Gagliano Co.’s damages.
BACKGROUND
¶6 As noted above, the origin of this case is the original lease
negotiated between Gagliano Co. and EPS, as guaranteed by Kraft. Kraft was the
chairman, founder, and chief executive officer of EPS. When Kraft initially
expressed interest in leasing the premises, he gave Gagliano Co. a proposed lease
which was reviewed by Gagliano Co.’s in-house counsel, Richard Kollauf, as well
as Martin Greenberg, counsel retained by Gagliano Co. for the lease negotiations.
On April 11, 2000, Anthony Gagliano, Kollauf, Greenberg and Kraft met to
discuss changes that Gagliano Co. was proposing to that draft lease. During those
negotiations, some of the terms and provisions were crossed out, and additional or
revised terms and provisions were noted in the margins. Kraft and
Anthony Gagliano, on behalf of Gagliano Co., then initialed each page to indicate
that they were in agreement with those changes.
¶7 Shortly thereafter, EPS expressed a desire to lease additional space
in the building. A revised lease was drafted by Greenberg and sent to Kraft for his
review. The revised lease was dated May 22, 2000, and stated that it superseded
the lease dated April 11, 2000.
¶8 As relevant to the primary issue in this case, the proposed lease
provided by Kraft to Gagliano Co. had contained a provision that permitted the
tenant—EPS—to extend the term of the lease for two additional three-year lease
terms. During the negotiations of April 11, that tenant extension provision was
4
No. 2018AP432
crossed out in its entirety and no alternative language was added. The revised
lease of May 22, however, included a different extension provision: rather than a
tenant extension option, the revised lease allowed for the landlord—
Gagliano Co.—to extend the term of the lease for an additional four years after the
expiration of the initial six-year lease term.
¶9 Kraft testified that when he received the revised lease, he did not
review the entire document. Instead, he only reviewed the “Data Sheet” section,
set forth on pages one and two of the revised lease, which summarized the general
terms of the lease. The Data Sheet section references the landlord extension
option as simply “the extension option” and notes its section number within the
lease. Kraft stated that he and Anthony Gagliano had never discussed a landlord
extension option, so he had assumed the reference was to a tenant option to
extend—even though during their negotiations of the original draft lease they had
crossed out the tenant extension option. In any event, Kraft never saw the landlord
extension option prior to executing the revised lease.
¶10 In 2002, Kraft began negotiating the sale of EPS’s assets to a private
equity firm, which created several new entities—including New EPS—for the
purpose of purchasing EPS’s assets, including its lease with Gagliano Co. The
purchase agreement included Kraft staying on to serve as the chief executive
officer for New EPS.
¶11 The sale of EPS’s assets required the consent of Gagliano Co. to
assign the lease to New EPS. As a condition of approving the assignment of the
lease, Gagliano Co. demanded that Kraft extend his personal guaranty of the lease
for New EPS. In fact, on the Consent to Assignment prepared by EPS for
Gagliano Co.’s signature, Anthony Gagliano added a notation at the bottom stating
5
No. 2018AP432
that its consent “is given on the basis that the [t]enant and any and all guarantors
of the [l]ease shall remain fully liable under the [l]ease.” Kraft initialed that
notation, indicating his agreement to extend his personal guaranty of the lease on
behalf of New EPS.
¶12 Furthermore, under the purchase agreement for EPS’s assets,
Gagliano Co. was required to prepare a Landlord Estoppel Certificate in
conjunction with the assignment, to set forth the status of the lease at that time.
That Certificate stated that the lease was “subject … to [l]andlord’s right of
extension[.]”
¶13 Kraft admitted that the landlord extension provision was discovered
during his negotiations with the equity firm to sell EPS’s assets. He further
conceded that New EPS had nevertheless agreed to assume all liabilities and
responsibilities under the lease, including the landlord extension option. Kraft
claimed that he called Anthony Gagliano and Greenberg and orally objected to the
provision when he discovered it, but he never sought to terminate the lease.
¶14 In October 2003, the lease was amended to add additional space to
the leased premises. The amendment specifically stated that the terms of the lease
as executed in May 2000 applied to the amendment. Kraft admitted that he
executed that amendment knowing that the landlord extension option was part of
the lease, and that he did not renew his objection to the provision with
Anthony Gagliano.
¶15 In December 2005, Gagliano Co. exercised the landlord extension
option, extending the expiration dates of the lease and the amendment to
June 2010 and January 2012, respectively. Kraft stated that he was “quite upset”
about the extension but did not pursue legal action against Gagliano Co. at that
6
No. 2018AP432
time; Kraft said it was a “business decision” because “[t]he space was working”
and was convenient for the employees, and the business was “doing well.”
¶16 In 2006, Quad/Graphics purchased the business from those entities
created pursuant to the previous sale. The lease for the premises, however, was
never assigned to Quad/Graphics; rather, Quad/Graphics effectively sublet the
premises from New EPS. Kraft retained an interest and stayed on as president and
chief executive officer of New EPS, as now owned by Quad/Graphics. The
following year, 2007, Kraft was terminated by Quad/Graphics.
¶17 In September 2008, New EPS informed Gagliano Co. that the
business was going to vacate the leased premises by October 31, 2008.
Gagliano Co. responded with a notice of default for New EPS’s failure to pay rent
after October 2008, since the lease terms had been extended to June 2010 and
January 2012. Gagliano Co. subsequently filed this action in December 2008
against Kraft, New EPS, and other entities that were created as a result of the sale
of the business over the years; the complaint was subsequently amended to include
Quad/Graphics as a defendant.
¶18 The case proceeded to trial in July 2011.2 At the close of
Gagliano Co.’s case-in-chief, New EPS and Kraft moved for a directed verdict.
They argued that the extension notice sent by Gagliano Co. in 2005 was not in
strict compliance with the requirements for notice provisions for commercial
leases because it was sent to Kraft, EPS, and other entities created in the 2002 sale,
2
The first trial in this case was before the Honorable Dennis P. Moroney.
7
No. 2018AP432
rather than New EPS, the entity to which the lease had been assigned. The trial
court agreed and dismissed Gagliano Co.’s claims against New EPS.
¶19 Gagliano Co. appealed, and this court reversed that decision, finding
that the extension notice provided by Gagliano Co. was sufficient. See Anthony
Gagliano & Co. v. Openfirst, LLC, 2013 WI App 19, ¶¶34, 37, 346 Wis. 2d 47,
828 N.W.2d 268, aff’d in part, rev’d in part, 2014 WI 65, 355 Wis. 2d 258, 850
N.W.2d 845 (Gagliano I). Our supreme court affirmed our determination on that
issue.3 Anthony Gagliano & Co. v. Openfirst, LLC, 2014 WI 65, ¶2, 355 Wis. 2d
258, 850 N.W.2d 845 (Gagliano II). Thus, the case was remanded to the trial
court for further proceedings, specifically for fact-finding relating to the
“lawfulness” of the landlord extension option. Id., ¶70.
¶20 Upon remand, Gagliano Co. moved the trial court for partial
summary judgment against New EPS and Kraft. With regard to its claims against
New EPS, Gagliano Co. argued that New EPS was aware of the landlord extension
option when it purchased EPS’s interest, and further, that it reaffirmed the lease
when it executed the amendment in October 2003. As a result, Gagliano Co.
asserted that New EPS was legally bound by the lease, including the landlord
extension option.
3
This court and the Wisconsin Supreme Court also reviewed the issue of whether the
trial court properly granted summary judgment in favor of Quad/Graphics, based on the issue of
whether the lease had been assigned to Quad/Graphics or whether it was merely the subtenant of
New EPS. We reversed the trial court, concluding that Quad/Graphics was bound by the lease
terms. Anthony Gagliano & Co. v. Openfirst, LLC, 2013 WI App 19, ¶36, 346 Wis. 2d 47, 828
N.W.2d 268, aff’d in part, rev’d in part, 2014 WI 65, 355 Wis. 2d 258, 850 N.W.2d 845(Gagliano I). However, our supreme court reversed that portion of our decision, concluding that
Quad/Graphics was a subtenant and not an assignee of the lease. Anthony Gagliano & Co. v.
Openfirst, LLC, 2014 WI 65, ¶71, 355 Wis. 2d 258, 850 N.W.2d 845 (Gagliano II). It therefore
remanded the case to the trial court for the dismissal of all Gagliano Co.’s claims against
Quad/Graphics. Id.8
No. 2018AP432
¶21 Gagliano Co. also asserted that Kraft was bound by his personal
guaranty of the lease. Kraft had contended that Gagliano Co. committed fraud by
including the landlord extension option in the lease without disclosing it to him.
However, Gagliano Co. argued that rather than seeking rescission of the lease
upon discovering that provision, Kraft’s actions in extending his personal guaranty
with the assignment of the lease to New EPS waived that defense.
¶22 The trial court denied the motion. It found that there was a material
fact in dispute as to whether Kraft’s alleged verbal objection to the landlord
extension option bound him to the terms of the lease, regardless of his subsequent
actions in affirming the lease. Gagliano Co.’s motion for reconsideration was also
rejected.4
¶23 The matter then proceeded to trial for the second time in
October 2017. The jury found that Gagliano Co. had a duty to disclose to Kraft
the landlord extension option and had breached that duty. The jury further
determined that Kraft’s failure to discover the landlord extension option was
justified under the circumstances and that he had not guaranteed New EPS’s
performance under the lease. Finally, the jury concluded that the inclusion of the
landlord extension option was a material alteration of the lease made without
Kraft’s consent, and that New EPS had not breached the lease when it vacated the
premises in October 2008 and stopped paying rent before the end of the extended
lease terms.
4
The motion for partial summary judgment was heard by the Honorable Christopher R.
Foley; the motion for reconsideration was heard by the Honorable Stephanie Rothstein, who also
presided over the second trial and ruled on Gagliano Co.’s postverdict motions.
9
No. 2018AP432
¶24 Gagliano Co. filed postverdict motions, arguing that there was
insufficient credible evidence to support the verdict; in the alternative, it requested
that the trial court grant judgment in its favor notwithstanding the verdict. The
trial court denied the motion, stating that it could not find “that the jury was so
misinformed as to the facts,” or that there were “essential facts” that were not
provided to the jury, such that the jury did not have a reasonable basis for the
verdict that was entered. The court therefore dismissed all of Gagliano Co.’s
claims on the merits with prejudice. This appeal follows.
DISCUSSION
¶25 The primary issue in this appeal revolves around the “lawfulness” of
the landlord extension option, a “factual issue” that remained in dispute after the
first trial and the subsequent appeals. See Gagliano II, 355 Wis. 2d 258,
¶¶44 n.13, 70. Kraft and New EPS argue that the inclusion of the option in the
original lease constitutes fraud on the part of Gagliano Co., and therefore neither
New EPS nor Kraft, under his personal guaranty, are bound by the lease. The
jury’s verdict inferentially supports that argument with its findings: that the option
was a “material alteration” of the lease; that Gagliano Co. breached its duty to
disclose the option to Kraft; and that New EPS did not breach the lease when it
vacated the premises prior to the new lease term expiration established when
Gagliano Co. exercised the option.
¶26 Gagliano Co., however, contends that argument fails because both
Kraft and New EPS were aware of the landlord extension provision but took no
action to terminate the lease, instead affirming the lease through their actions.
Therefore, Gagliano Co. argues the verdict is not supported by the evidence. “In
reviewing the sufficiency of evidence on appeal, we view the evidence in the light
10
No. 2018AP432
most favorable to the jury’s verdict, and we will sustain the jury’s verdict if there
is any credible evidence ‘under any reasonable view, that leads to an inference
supporting the jury’s finding.’” Western Wis. Water, Inc. v. Quality Beverages of
Wis., Inc., 2007 WI App 188, ¶13, 305 Wis. 2d 217, 738 N.W.2d 114 (citation
omitted). We review de novo the trial court’s determination regarding whether the
evidence is sufficient to uphold the jury’s verdict. See Walter v. Cessna Aircraft
Co., 121 Wis. 2d 221, 231, 358 N.W.2d 816 (Ct. App. 1984).
¶27 “A material misrepresentation of fact may render a contract void or
voidable.” Bank of Sun Prairie v. Esser, 155 Wis. 2d 724, 731, 456 N.W.2d 585.
(1990). The party who was “fraudulently induced to enter a contract may affirm
the contract and seek damages for breach or pursue the equitable remedy of
rescission and seek restitutionary damages.” Tietsworth v. Harley-Davidson, Inc.,
2004 WI 32, ¶36, 270 Wis. 2d 146, 677 N.W.2d 233. Here, upon their discovery
of the landlord extension provision, Kraft and New EPS did neither; they simply
continued to perform their obligations under the lease, without seeking either
rescission of the lease or damages relating to the inclusion of the option.
¶28 Nevertheless, Kraft and New EPS argue that Gagliano Co.’s
inclusion of the landlord extension option was “fraud in the factum,” that is, “the
sort of fraud that procures a party’s signature to an instrument without knowledge
of its true nature or contents,” and that “such fraud ‘render[s] the instrument
entirely void, thus leaving no right, title or interest that could be diminished or
defeated.’” Bank of New Glarus v. Swartwood, 2006 WI App 224, ¶43, 297
Wis. 2d 458, 725 N.W.2d 944 (brackets in original; citation omitted). However,
Kraft and New EPS fail to explain how their continued performance under the
lease after discovering the alleged fraudulent provision supports their argument
that the lease is void.
11
No. 2018AP432
¶29 In fact, our supreme court “has consistently applied the rule that a
party may not seek to set aside a contract on the basis of fraud and at the same
time recover the benefit of the bargain.” Digicorp, Inc. v. Ameritech Corp., 2003
WI 54, ¶67, 262 Wis. 2d 32, 662 N.W.2d 652. That appears to be essentially what
Kraft and New EPS are trying to do: they chose not to pursue legal action against
Gagliano Co.—either upon their discovery of the landlord extension option or
after Gagliano Co. exercised the option—instead making the business decision to
continue performing their obligations under the lease because the premises worked
well for the business, which was thriving. By Kraft’s own admission, after his
verbal objection to Gagliano Co. regarding the option, he was content to continue
under the lease, unless and until there came a point in time where Kraft and
New EPS “had to call [Anthony Gagliano] on it,” stating they had planned to
“fight the battle at that point.” In other words, Kraft and New EPS maintained
their “benefit of the bargain”—occupying the leased premises—and then sought to
set aside the lease on the basis of fraud when they no longer wished to maintain
that benefit. This conduct is contrary to the established law relating to fraudulent
contract provisions upon which Kraft and New EPS rely for their defense. Thus,
Kraft and New EPS’s argument—that the lease is void due to “fraud in the
factum” at the time of its inception—fails.5
¶30 This same reasoning applies to Kraft’s guaranty. Generally, any
change in a contract “that results in larger responsibilities or liabilities on the part
of the principal, made without the consent of the guarantor, acts as a discharge of
5
Gagliano Co. raised the argument that Kraft and New EPS’s fraud defense was barred
under the six-year statute of limitations for such claims. Because the result of our analysis directs
the entry of a judgment notwithstanding the verdict in favor of Gagliano Co., we do not reach that
issue.
12
No. 2018AP432
the guarantor.” Baumgarten v. Bubolz, 104 Wis. 2d 210, 215, 311 N.W.2d 230(Ct. App. 1981). However, a guarantor’s right to release may be waived if that
guarantor “has knowledge of and assents, either expressly or by implication, to
changes in the obligation [the guarantor] has assumed.” Id. Kraft’s actions
affirmed the lease for both New EPS and for himself as the guarantor; he therefore
waived his right to be released from the guaranty.
¶31 Finally, we address Kraft’s alternative argument that the statute of
frauds acts to bar Gagliano Co.’s breach of contract claim. Kraft asserts this on
the basis that Anthony Gagliano owned the premises personally but executed the
lease under the company name. See WIS. STAT. § 706.02 (2017-18); see also
Gillespie v. Dunlap, 125 Wis. 2d 461, 466, 373 N.W.2d 61 (Ct. App. 1985). It
was not until executing the Landlord Estoppel Certificate in November 2002, upon
the assignment of the lease from EPS to New EPS, that Anthony Gagliano noted
this ownership relationship.
¶32 The statute of frauds argument was first raised by Kraft in a motion
to dismiss that was heard in October 2017; it was not raised prior to or during the
first trial. The trial court rejected the argument, noting that the statute of frauds “is
meant to protect the parties that are instant to the contract,” and that based on the
circumstances of this case, the court viewed Anthony Gagliano as “the owner of
the property, as someone akin to an unidentified principal in the transaction.” The
court further noted that Anthony Gagliano had “acted in good faith” regarding the
relationship between himself personally and his corporation.
¶33 We agree. “The statute of frauds was intended to prevent fraud and
perjury, not to give one party or another a technical escape from a fair and definite
agreement.” U.S. Oil Co. v. Midwest Auto Care Servs., Inc., 150 Wis. 2d 80, 90,
13
No. 2018AP432
440 N.W.2d 825 (Ct. App. 1989). Thus, we reject Kraft’s contention that the jury
verdict should be affirmed on this basis.
¶34 In sum, we agree with Gagliano Co. that the evidence does not
support the jury’s verdict. Accordingly, we reverse the trial court’s order denying
Gagliano Co.’s postverdict motions, and remand this matter to the trial court with
directions to enter a directed verdict in favor of Gagliano Co. Furthermore,
because damages incurred by Gagliano Co. were never determined in previous
proceedings, we direct the trial court to conduct further proceedings as necessary
to determine a damages award.
By the Court.—Order reversed and cause remanded with directions.
Not recommended for publication in the official reports.
14